Complying with the Affordable Care Act’s Exchange Notice Requirement

The Patient Protection and Affordable Care Act (the “Act”) amends the Fair Labor Standards Act (“FLSA”) to require employers of all sizes to provide their employees a notice of the availability of coverage through public health insurance exchanges by March 1, 2013.1 In January of this year, the U.S. Department of Labor, the agency charged with administering the FLSA, announced a delay in the effective date of the notice to the “late summer or fall of 2013.”2 In Technical Release No. 2013-02 (entitled, “Guidance on the Notice to Employees of Coverage Options under Fair Labor Standards Act §18B and Updated Model Election Notice under the Consolidated Omnibus Budget Reconciliation Act of 1985”),3 the Labor Department provided details about the FLSA exchange notice requirement. The effective date of the requirement is now October 1, 2013 for current employees or within 14 days of an employee’s start date for employees hired after that date.

Background

The FLSA exchange notice must include a description of the existence of, and services provided by, public exchanges. That Act further requires that the notice:

Explain how the employee may be eligible for a premium tax credit or a cost-sharing reduction if the employer’s plan does not meet certain requirements;

Inform employees that if they purchase a qualified health plan through the exchange, then they may lose any employer contribution toward the cost of employer-provided coverage, and that all or a portion of the employer contribution to employer-provided coverage may be excludable for federal income tax purposes;

Include contact information for customer service resources within the exchange, and an explanation of appeal rights;

Meet certain accessibility and readability requirements; and

Be in writing.

The Department has provided two model notices — one for employers who offer a health plan4 to some or all employees and another for employers who do not.5 The model notice for employers who offer a health plan includes two parts. Part A (entitled “General Information”) tracks the requirement of the statute. Part B (entitled, “Information About Health Coverage Offered by Your Employer”) solicits information about the employer’s group health plan coverage that is intended to assist employees who apply for subsidized coverage under a group health plan product offered through the exchange. Part B includes an optional section that asks the employer to disclose whether the health care coverage offered meets the minimum value standard and whether the cost of coverage is intended to be affordable. While not required, employers may decide to complete this part of the notice in order to avoid having to respond to inquiries from exchanges seeking to process an individual’s application.

The notice requirement applies to all employers who are subject to the FLSA. In general, the FLSA applies to employers that employ one or more employees who are engaged in, or produce goods for, interstate commerce. For most firms, a test of not less than $500,000 in annual dollar volume of business applies. The FLSA also specifically covers the following entities, regardless of dollar volume of business: hospitals; institutions primarily engaged in the care of the sick, the aged, mentally ill, or disabled who reside on the premises; schools for children who are mentally or physically disabled or gifted; preschools, elementary and secondary schools, and institutions of higher education; and federal, state and local government agencies. (For an explanation of the reach of the FLSA, please see http://www.dol.gov/compliance/guide/minwage.htm.)

Timing and Delivery of Notice

Under the heading “Timing and Delivery of Notice,” Technical Release No. 2013-02 provides as follows:

Employers are required to provide the notice to each new employee at the time of hiring beginning October 1, 2013. For 2014, the Department will consider a notice to be provided at the time of hiring if the notice is provided within 14 days of an employee’s start date. With respect to employees who are current employees before October 1, 2013, employers are required to provide the notice not later than October 1, 2013. The notice is required to be provided automatically, free of charge.

The notice must be provided in writing in a manner calculated to be understood by the average employee. It may be provided by first-class mail. Alternatively, it may be provided electronically if the requirements of the Department of Labor’s electronic disclosure safe harbor at 29 CFR 2520.104b-1(c) are met.

(Emphasis added).

The reference to “employees” means all employees, full-time and part-time, but there is no need to provide notices to dependents. Nor does the notice have to be provided to former employees or other individuals who are not employees but may be eligible for coverage (e.g., under COBRA).

The question of who, exactly, is an employee is an important one. The Act’s exchange notice requirement amends the FLSA. Thus, while the Internal Revenue Code and ERISA look to the “common law” standard, applicable court precedent interpreting the FLSA’s use of the term “employee” relies on the broader, “economic realities” test. Accordingly, an individual is an “employee” for FLSA purposes if he or she is economically dependent on the business for which he or she performs personal services. Thus, individuals properly classified as independent contractors for tax purposes may nevertheless be employees (to whom notice must be provided) for FLSA purposes.

Delivery can be in hand or by first class mail. Delivery may also be made electronically under the Department of Labor’s “electronic disclosure safe harbor at 29 CFR 2520.104b-1(c).” The regulations at 29 CFR 2520.104b-1 provide a safe harbor under which electronic delivery is permitted to employees who have the ability to effectively access documents furnished in electronic form at any location where the employee is reasonably expected to perform duties as an employee and with respect to whom access to the employer’s or plan sponsor’s electronic information system is an integral part of those duties. Under the safe harbor, other individuals may also opt into electronic delivery.

Enforcement

The Act does not appear to impose any separate penalty for ignoring the exchange notice requirement. The FLSA authorizes administrative actions, civil suits and criminal prosecutions for violations of pre-existing FLSA sections, but not, it seems, for this requirement. This does not mean, of course, that noncompliance is a good idea or even a viable option. The lack of penalties does not translate into a lack of consequences. Plan sponsors still have a fiduciary obligation to be forthcoming with plan participants and beneficiaries. (This situation is similar to the rules governing the distribution of summary plan descriptions — while not technically required, there are many good reasons to comply.)

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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